Y1 - National income

Question 1

What are the withdrawals for the circular flow of income?

Answer 1

• Imports
• Savings
• Taxation

Question 2

What are the injections into the circular flow of income?

Answer 2

• Investment
• Exports
• Government spending

Question 3

What are the two flows in the circular flow of income

Answer 3

To firms, To households

• FoP and Goods/Services
• Consumption and Factor incomes

Question 4

Define the wealth effect

Answer 4

The effect on incomes or spending when asset value changes

- Wealth does not have direct impact on circular flow of income but changes in wealth impact spending and income

Question 5

Define injections

Answer 5

Flows into the circular flow of income comprising of investment, government spending and exports

Question 6

Define withdrawals

Answer 6

Flows out of the circular flow of income comprising of savings, tax and imports

Question 7

What are the different positions for withdrawals/injections?

Answer 7

Injections = withdrawals - equilibrium
Injections > withdrawals - economic growth
Injections < withdrawals - economy contracts

Question 8

Define multiplier effect

Answer 8

An increase in final income arising from any new injection of spending
- Size depends on household’s MPW and MPC

Question 9

Define MPW

Answer 9

Marginal propensity to withdraw
- A measure of how much of ay extra pound earned is saved, taxed or spent outside the economy on imports
Multiplier = 1/MPW = 1/(MPS+MPT+MPM)

Question 10

Define MPC

Answer 10

Marginal propensity to consume
- A measure of how much of any extra pound earned is spent within the economy
Multiplier = 1/(1-MPC)

Question 11

What is the multiplier calculation?

Answer 11

MPC + MPW = 1
More MPW = lower multiplier
More MPC = higher multiplier